Metropolitan Bank and Trust Company vs. CPR Promotions and Marketing, Inc. et al.

A mortgagee claiming a deficiency after extrajudicial foreclosure must prove the exact amount due as of the foreclosure sale and the foreclosure expenses; where the computation is inconsistent and the expenses are unsubstantiated, the deficiency claim fails. A mortgagor’s correlative claim to recover excess foreclosure proceeds is a compulsory counterclaim that must be pleaded in the answer, and failure to do so bars recovery.

Respondent CPR Promotions and Marketing, Inc. was a corporate borrower, and respondent spouses Cornelio P. Reynoso, Jr. and Leoniza F. Reynoso were its President and Treasurer, respectively. From February to October 1997, CPR Promotions obtained fifteen loans from petitioner Metropolitan Bank and Trust Company evidenced by promissory notes totaling ₱12,891,397.78. The obligations were secured by two deeds of real estate mortgage: a February 2, 1996 mortgage over TCT No. 624835 securing ₱6,500,000, and a July 18, 1996 mortgage over TCT Nos. 565381, 263421, and 274682 securing ₱2,500,000. All the mortgaged properties were registered in the spouses’ names except TCT No. 565381, which was registered under CPR Promotions. On December 8, 1997, the spouses executed a continuing surety agreement solidarily binding themselves with CPR Promotions up to ₱13,000,000.

From February to October 1997, CPR Promotions obtained loans from MBTC covered by fifteen promissory notes, all signed by the spouses as Treasurer and President, respectively. The notes totalled ₱12,891,397.78 in principal. To secure the loans, the spouses executed two deeds of real estate mortgage: the first, executed on February 2, 1996 over property covered by TCT No. 624835, secured ₱6,500,000; the second, executed on July 18, 1996 over properties covered by TCT Nos. 565381, 263421, and 274682, secured ₱2,500,000. All mortgaged properties were registered in the spouses’ names except TCT No. 565381, which was registered under CPR Promotions. On December 8, 1997, the spouses executed a continuing surety agreement binding themselves solidarily with CPR Promotions to pay CPR Promotions’ loans, not to exceed ₱13,000,000.

Upon maturity of the loans, respondents defaulted, prompting MBTC to file a petition for extrajudicial foreclosure of the real estate mortgages under Act No. 3135, as amended. MBTC’s foreclosure request dated March 6, 1998 stated that the fifteen loans had a total principal amount of ₱12,891,397.78 and that, as of February 10, 1998, the total amount due was ₱11,216,783.99. On May 5, 1998, the properties covered by TCT Nos. 624835 and 565381 were sold at public auction, MBTC submitting the highest bid of ₱10,374,000. The next day, May 6, 1998, the remaining mortgaged properties were sold, MBTC again submitting the highest bid of ₱3,240,000. The corresponding certificates of sale were issued to MBTC on July 15 and 16, 1998. The two auction sales thus produced total proceeds of ₱13,614,000.

After the foreclosure sales, MBTC alleged a deficiency balance of ₱2,628,520.73 plus interest and charges. Its Statement of Account as of May 5, 1998 reflected principal outstanding of ₱12,450,652.22, past due interest of ₱1,111,986.53, penalties of ₱747,859.44, and a grand total of ₱14,310,498.19. Applying the auction proceeds yielded an asserted deficiency of ₱2,443,143.43; with four months’ interest of ₱185,337.30, the total claim reached ₱2,628,520.73. Despite demand, respondents did not settle the alleged deficiency, and MBTC filed an action for collection.

In their Answer with compulsory counterclaim, respondents prayed for moral damages of no less than ₱500,000, exemplary damages of no less than ₱250,000, and attorney’s fees; they did not pray for a refund. Only in their Appellant’s Brief before the Court of Appeals did respondents seek return of ₱722,602.22 as the alleged excess of the foreclosure proceeds. The trial court accepted the ₱2,628,520.73 deficiency figure as of September 18, 1998. The Court of Appeals, by contrast, found that the amount in the certificates changed from “total amount due” to “principal amount” and inferred that the ₱12,891,397.78 figure included interest and other charges.

• Continuing Surety Agreement: Petitioner argued that the appellate court erred in finding that MBTC did not introduce the continuing surety agreement on which the trial court based the spouses’ solidary liability with CPR Promotions.

• Amount Due / Refund Computation: Petitioner asserted that the appellate court erroneously used ₱12,891,397.78 as the total outstanding obligation when the amount due as of February 10, 1998 was ₱11,216,783.99.

• Counterclaim: Petitioner maintained that respondents never set up a counterclaim for refund of any amount, so the appellate court could not award ₱722,602.22.

• Foreclosure Expenses: Petitioner claimed that respondents should be liable for specified foreclosure expenses—filing fees, publication expense, Sheriff’s Commission on Sale, stipulated attorney’s fee, registration fee for the Certificate of Sale, insurance premium, and other miscellaneous expenses—totalling ₱1,373,238.04 and ₱419,166.67 for the first and second foreclosure sales, respectively.

• Propriety of Refund: Respondents maintained that the appellate court correctly granted the refund because their Answer with Compulsory Counterclaim laid down in detail the excess of the foreclosure prices over their obligation.

• Raising the Issue: Respondents argued that from the beginning of the case they had raised MBTC’s taking over of lands whose values were above their financial liabilities, and that the appellate court therefore properly ruled on the refund.

• Amount Difference: Respondents insisted that there was no substantive difference between the outstanding amount stated as of February 10, 1998 and ₱12,891,397.78 except accumulated interest, penalties, and other charges, which caused the increase from the February 10, 1998 amount.

• Continuing Surety Agreement / Spouses’ Solidary Liability: Whether the Court of Appeals gravely abused its discretion when it failed to consider the continuing surety agreement in evidence and ruled that MBTC failed to prove that the spouses Reynoso were solidarily liable with CPR Promotions.

• Deficiency Balance: Whether the Court of Appeals gravely abused its discretion when it grossly misappreciated the promissory notes, real estate mortgages, petition for extrajudicial foreclosure, certificates of sale, and statement of account, and ruled that MBTC failed to prove a deficiency balance resulted after the foreclosure sales.

• Compulsory Counterclaim: Whether respondents’ claim for recovery of the alleged excess of the bid prices was a compulsory counterclaim that had to be raised in their Answer, and whether their failure to raise it until their Appellant’s Brief barred the claim.

• Continuing Surety Agreement / Spouses’ Solidary Liability: Not reached. The Court expressly declined to belabor this assigned error after resolving the deficiency and counterclaim issues.

• Deficiency Balance: No. MBTC failed to prove the exact amount due at foreclosure and the expenses incurred. The appellate court’s computation, however, was itself erroneous: ₱12,891,397.78 was the aggregate principal of the fifteen promissory notes, not the total amount due including interest.

• Compulsory Counterclaim: Yes, the refund claim was compulsory, and it was barred. It arose from the same transaction and evidence as the deficiency suit and should have been pleaded in respondents’ Answer, but it was raised only on appeal.

• Continuing Surety Agreement / Spouses’ Solidary Liability: The Court did not reach this assigned error. Having determined that MBTC failed to prove a deficiency and that respondents’ refund claim was barred, it stated that it need not belabor the other assigned errors. No further ruling on the continuing surety agreement or the spouses’ solidary liability was therefore necessary.

• Deficiency Balance: Under Section 4, Rule 68 of the Rules of Court, the amount realized from a foreclosure sale must first answer for the costs of the sale and then be applied to the mortgage debt; any residue goes to the mortgagor. A deficit exists only when the sale proceeds are insufficient to cover both the costs of foreclosure proceedings and the amount due, inclusive of interest and penalties, at the time of foreclosure. MBTC admitted that the amount due as of February 10, 1998 was ₱11,216,783.99, already inclusive of interest and penalties. Its Statement of Account then asserted that the principal outstanding as of May 5, 1998 was ₱12,450,652.22, a figure higher than the admitted total amount due for February 1998, which was inconsistent unless a new loan had been contracted. MBTC also failed to explain how it arrived at the asserted deficiency of ₱2,443,143.43; working backward from its own figures would require missing interest and penalties of ₱3,047,954.73 for the three-month period, while the Statement of Account reflected combined interest and penalty figures of only ₱1,859,845.97. The appellate court’s alternate computation was likewise flawed because ₱12,891,397.78 was the sum of the principal amounts of the fifteen promissory notes, not the total amount due as of May 1998. As for foreclosure expenses, MBTC offered no receipts for filing fees, publication, Sheriff’s Commission, registration, insurance, or miscellaneous expenses, and instead asked the Court to take judicial notice. The Court could not take judicial notice of the 10% attorney’s fees because the stipulated fee may be reduced in an extrajudicial foreclosure, nor of publication and insurance costs because there are no standard rates, nor of unsubstantiated registration and miscellaneous expenses. Since the party asserting a deficiency must prove its existence and amount, MBTC’s claim failed.

• Compulsory Counterclaim: A compulsory counterclaim is one that arises out of or is connected with the transaction or occurrence constituting the subject matter of the opposing party’s claim and does not require the presence of third parties over whom the court cannot acquire jurisdiction. The Court applied the four familiar tests: whether the issues of fact or law are largely the same, whether res judicata would bar a subsequent suit, whether substantially the same evidence supports or refutes both claims, and whether there is a logical relation such that separate trials would duplicate effort. A claim for recovery of excess foreclosure proceeds is compulsory in the mortgagee’s deficiency suit because both claims require the same evidence, a determination in favor of one necessarily bars the other, both arise from the same transaction, and separate trials would waste judicial resources. Rule 11, Section 8 requires a compulsory counterclaim to be contained in the answer, and Rule 9, Section 2 bars a compulsory counterclaim not set up. Respondents initially claimed only moral damages, exemplary damages, and attorney’s fees in their Answer; their refund claim appeared for the first time in their Appellant’s Brief. That belated assertion did not cure the failure to timely plead the counterclaim. Consequently, the appellate court’s refund award was deleted.

• Compulsory Counterclaim for Excess Foreclosure Proceeds — A claim for recovery of the excess of the bid price over the amount due is a compulsory counterclaim in the mortgagee’s action for recovery of a deficiency after extrajudicial foreclosure. The tests of compulsoriness are whether the issues of fact or law are largely the same, whether res judicata would bar a subsequent suit, whether substantially the same evidence supports or refutes both claims, and whether there is a logical relation between them. The counterclaim must be set up in the answer; otherwise, it is barred.

• Deficiency After Extrajudicial Foreclosure Requires Proof of Amount Due and Costs — A mortgagee may recover a deficiency only when the foreclosure sale proceeds are insufficient to cover the costs of foreclosure proceedings and the amount due, inclusive of interest and penalties, at the time of foreclosure. The mortgagee bears the burden of proving both the existence and the exact amount of the deficiency. Inconsistent statements of account and unsupported computations cannot sustain a deficiency judgment.

• Foreclosure Expenses Must Be Proved; Limits on Judicial Notice — A creditor claiming reimbursement of foreclosure expenses must prove those expenses with receipts or other competent evidence. Courts cannot take judicial notice of attorney’s fees, publication costs, or insurance premiums absent standard rates. A stipulated attorney’s fee of 10% may be reduced in an extrajudicial foreclosure because the legal work involved is routine and the fee is a mere incident of collection.

• “Based on the above tests, it is evident that a claim for recovery of the excess in the bid price vis-à-vis the amount due should be interposed as a compulsory counterclaim in an action for recovery of a deficiency filed by the mortgagee against the debtor-mortgagor.” — This passage states the central remedial holding: the excess-proceeds claim and the deficiency claim are inseparable for pleading purposes.

• “Verily, there can only be a deficit when the proceeds of the sale is not sufficient to cover (1) the costs of foreclosure proceedings; and (2) the amount due to the creditor, inclusive of interests and penalties, if any, at the time of foreclosure.” — This is the Court’s definition of the deficiency that a mortgagee must prove after foreclosure.

• “In demanding payment of a deficiency in an extrajudicial foreclosure of mortgage, proving that there is indeed one and what its exact amount is, is naturally a precondition thereto.” — This states the burden and proof requirement that defeated MBTC’s deficiency claim.

• “It is elementary that a defending party’s compulsory counterclaim should be interposed at the time he files his Answer, and that failure to do so shall effectively bar such claim.” — This passage supplies the procedural basis for deleting the appellate court’s refund award.

• Spouses Mendiola vs. Court of Appeals, G.R. No. 159746, July 18, 2012, 677 SCRA 27 — Cited for the definition and requisites of a compulsory counterclaim and for the rule that it must be included in the answer.

• Calibre Traders, Inc. vs. Bayer Philippines, Inc., G.R. No. 161431, October 13, 2010, 663 SCRA 34 — Cited for the four tests used to distinguish a compulsory counterclaim from a permissive one.

• Prudential Bank vs. Martinez, No. L-51768, September 14, 1990, 189 SCRA 612 — Cited for the mortgagee’s right to recover a deficiency when the foreclosure sale proceeds are insufficient to pay the debt.

• Mambulao Lumber Company vs. Philippine National Bank, No. L-22973, January 30, 1968, 22 SCRA 359 — Cited for the principle that a 10% attorney’s fee may be unreasonable in an extrajudicial foreclosure where the attorney merely filed a petition for foreclosure.

• Bank of the Philippine Islands, Inc. vs. Spouses Norman and Angelina Yu, G.R. No. 184122, January 20, 2010, 610 SCRA 412 — Cited for reducing the stipulated attorney’s fee from 10% to 1% in an extrajudicial foreclosure.

• Resort Hotels Corporation vs. Development Bank of the Philippines, G.R. No. 180439, December 23, 2009, 609 SCRA 16 — Cited for the burden of proof rule that he who asserts a claim must prove it.

• Rule 6, Section 7, Rules of Court — Defines a compulsory counterclaim and was applied to classify respondents’ refund claim as compulsory because it arose from the same loan, mortgage, and foreclosure transaction as MBTC’s deficiency claim.

• Rule 11, Section 8, Rules of Court — Provides that a compulsory counterclaim a defending party has when filing an answer must be contained in the answer; respondents’ refund claim was not.

• Rule 9, Section 2, Rules of Court — Provides that a compulsory counterclaim not set up is barred; this barred respondents’ belated refund claim.

• Rule 68, Section 4, Rules of Court — Governs the disposition of foreclosure sale proceeds and was used to determine when a deficiency exists.

• Rule 45, Section 1, Rules of Court — Provides that a petition for review on certiorari should raise only questions of law; the Court nonetheless reviewed the appellate court’s factual findings because they conflicted with the trial court’s and were manifestly mistaken or unsupported.

• Act No. 3135, as amended — Governs extrajudicial foreclosure of real estate mortgages; MBTC’s foreclosure sale was conducted under this statute.

Associate Justices Diosdado M. Peralta, Martin S. Villarama, Jr., Bienvenido L. Reyes, and Francis H. Jardeleza concurred.